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Business Combination and Goodwill | 12 Months Ended
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Dec. 31, 2019
Business Combinations [Abstract] |
Business Combination and Goodwill | Business Combination and Goodwill On December 8, 2017, (the “Effective Time”) the merger (the “Merger”) of ApolloMed’s wholly-owned subsidiary, Apollo Acquisition Corp., with Network Medical Management, Inc. was completed, in accordance with the terms and conditions of the Agreement and Plan of Merger, dated as of December 21, 2016 (as amended on March 30, 2017 and October 17, 2017), by and among the Company, Merger Sub, NMM and Kenneth Sim, M.D., as the NMM shareholders’ representative. As a result of the Merger, NMM now is a wholly-owned subsidiary of ApolloMed and former NMM shareholders own a majority of the issued and outstanding common stock of the Company and control the Board of ApolloMed. As of the Effective Time, the Company’s board of directors approved a change in the Company’s fiscal year end from March 31 to December 31. Pursuant to the Merger Agreement, at the Effective Time, each issued and outstanding share of NMM common stock converted into the right to receive (i) such number of fully paid and nonassessable shares of ApolloMed’s common stock that resulted in the NMM shareholders having a right to receive an aggregate number of shares of ApolloMed’s common stock that represented 82% of the total issued and outstanding shares of ApolloMed common stock immediately following the Effective Time, with no NMM dissenting shareholder interests as of the Effective Time (the “exchange ratio”), plus (ii) an aggregate of 2,566,666 ApolloMed’s common stock, with no NMM dissenting shareholder interests as of the Effective Time, and (iii) common stock warrants to purchase a pro-rata portion of an aggregate of 850,000 shares of common stock of ApolloMed, exercisable at $11.00 per share and warrants to purchase an aggregate of 900,000 shares of common stock of ApolloMed at $10.00 per share. At the Effective Time, pre-Merger ApolloMed stockholders held their existing shares of ApolloMed’s common stock. At the Effective Time, ApolloMed held back 10% of the total number of shares of ApolloMed’s common stock issuable to pre-Merger NMM shareholders in the Merger to secure indemnification of ApolloMed and its affiliates under the Merger Agreement. Separately, indemnification of pre-Merger NMM shareholders under the Merger Agreement was made by the issuance by ApolloMed to pre-Merger NMM shareholders of new additional shares of common stock (capped at the same number of shares of ApolloMed’s common stock as are subject to the holdback for the indemnification of ApolloMed). These holdback shares will be held for a period of up to 24 months after the closing of the Merger (to be distributed on a pro-rata basis to former NMM shareholders), during which ApolloMed may seek indemnification for any breach of, or noncompliance with, any provision of the Merger agreement, by NMM. Half of these shares will be issued on the first and second anniversary of the Effective Time respectively. As of December 31, 2019 all holdback shares had been released. For purposes of calculating the exchange ratio, (A) the aggregate number of shares of ApolloMed common stock held by the NMM shareholders immediately following the Effective Time excluded (i) any shares of ApolloMed common stock owned by NMM shareholders immediately prior to the Effective Time, (ii) the Series A warrant and Series B warrant issued by ApolloMed to NMM to purchase ApolloMed common stock (the “ApolloMed Warrants”) and (iii) any shares of ApolloMed common stock issued or issuable to NMM shareholders pursuant to the exercise of the ApolloMed Warrants, and (B) the total number of issued and outstanding shares of ApolloMed common stock immediately following the Effective Time excluded 520,081 shares of ApolloMed common stock issued or issuable under a Convertible Promissory Note to Alliance Apex, LLC (“Alliance”), whose 50% member and manager is a member of ApolloMed’s board of directors, for $5.0 million and accrued interest pursuant to the Securities Purchase Agreement between ApolloMed and Alliance dated as of March 30, 2017. The consideration for the transaction was 18% of the total issued and outstanding shares of ApolloMed common stock, or 6,109,205 (immediately following the Merger). In addition, the fair value of NMM’s 50% interest in APAACO, an entity that was owned 50% by ApolloMed and 50% by NMM, was remeasured at fair value as of the Effective Time and added to the consideration transferred to ApolloMed as a result of NMM relinquishing its equity investment in APAACO in order to obtain control of ApolloMed. The fair value of NMM’s noncontrolling interest in APAACO was $5.1 million. Total purchase consideration consisted of the following:
Equity consideration (1) | $ | 61,092,050 |
Fair value of ApolloMed preferred stock held by NMM (2) | 19,118,000 |
Fair value of NMM’s noncontrolling interest in APAACO (3) | 5,129,000 |
Fair value of the outstanding ApolloMed stock options (4) | 1,055,333 |
Total purchase consideration | $ | 86,394,383 |
(1) | Equity consideration
Immediately following the Effective Time, pre-merger ApolloMed stockholders continued to hold an aggregate of 6,109,205 shares of ApolloMed common stock. The equity consideration, which represents a portion of the consideration deemed transferred to the pre-Merger ApolloMed stockholders in the Merger, is calculated based on the number of shares of the combined company that the pre-Merger ApolloMed stockholders would own as of the closing of the Merger.
Number of shares of the combined company that would be owned by pre-Merger ApolloMed stockholders (*) | 6,109,205 |
Multiplied by the price per share of ApolloMed’s common stock (**) | $ | 10.00 |
Equity Consideration | $ | 61,092,050 |
(*) | Represents the number of shares of the combined company that pre-Merger ApolloMed stockholders would own at closing of the Merger.
(**) | Represents the closing price of ApolloMed’s common stock on December 8, 2017.
(2) | Fair value of ApolloMed’s preferred shares held by NMM
NMM currently owns all the shares of ApolloMed Series A preferred stock and Series B preferred stock, which were acquired prior to the Merger. As part of the Merger, the ApolloMed Series A preferred stock and Series B preferred stock are remeasured at fair value and included as part of the consideration transferred to ApolloMed. The fair value of the Series A preferred stock and Series B preferred stock is reflective of the liquidation preferences, claims of priority and conversion option values thereof. In aggregate, the Series A preferred stock and Series B preferred stock were valued to be $19.1 million. The valuation methodology was based on an Option Pricing Method ("OPM") which utilized the observable publicly traded common stock price in valuing the Series A preferred stock and the Series B preferred stock within the context of the capital structure of the Company. OPM assumptions included an expected term of 2 years, volatility rate of 37.9%, and a risk-free rate of 1.8%. The fair value of the liquidation preference for the Series A preferred stock and the Series B preferred stock was determined to be $12.7 million and the fair value of the conversion option was determined to be $6.4 million or an aggregate total fair value of $19.1 million.
(3) | Fair value of NMM’s 50% share of APA ACO Inc.
Prior to the Merger, APAACO was owned 50% by ApolloMed and 50% NMM. NMM’s noncontrolling interest in APAACO has been remeasured at fair value as of the closing date and is added to the consideration transferred to ApolloMed as a result of NMM relinquishing its equity investment in APAACO in order to obtain control of ApolloMed. The fair value of NMM’s noncontrolling interest in APAACO has been estimated to be $5.1 million using the discounted cash flow method and NMM recorded a gain on investment for the same amount to reflect the fair value of this investment prior the Merger.
(4) | Fair value of the ApolloMed outstanding stock options
The fair value of the outstanding ApolloMed stock options is included in consideration transferred in accordance with ASC 805. The outstanding ApolloMed stock options are expected to vest in conjunction with the Merger due to a pre-existing change-of-control provision associated with the awards. There is no future service requirement. The following table sets forth the final allocation of the purchase consideration to the identifiable tangible and intangible assets acquired and liabilities assumed of ApolloMed and MMG (see “MMG Transaction” below), with the excess recorded as goodwill:
| Balance Sheet
Assets acquired |
Cash and cash equivalents | $ | 36,367,555 |
Accounts receivable, net | 7,261,588 |
Other receivables | 3,211,028 |
Prepaid expenses | 249,193 |
Property, plant and equipment, net | 1,114,332 |
Restricted cash | 745,220 |
Fair value of intangible assets acquired | 14,984,000 |
Deferred tax assets | 2,498,417 |
Other assets | 217,241 |
Goodwill | 86,197,395 |
Accounts payable and accrued liabilities | (8,632,893 | )
Medical liabilities | (39,353,540 | )
Line of credit | (25,000 | )
Convertible note payable, net | (5,376,215 | )
Convertible note payable - related party | (9,921,938 | )
Noncontrolling interest | (3,142,000 | )
Net assets acquired | $ | 86,394,383 |
Total purchase consideration | $ | 86,394,383 |
During the year ended December 31, 2018, goodwill related to the Merger increased by $0.7 million due to the $0.9 million increase in the fair value of the outstanding ApolloMed stock options, which was partially offset by the $0.2 million decrease in the related deferred tax asset with a commensurate adjustment recorded to additional paid in capital. In addition, during the year ended December 31, 2018, goodwill and deferred tax assets decreased by $0.9 million resulting from an adjustment associated with the allocation of the Merger transaction costs. As a result, in aggregate, during the year ended December 31, 2018, goodwill decreased by $0.2 million. Convertible Note Payable – Related Party On March 30, 2017, ApolloMed issued a Convertible Promissory Note to Alliance Apex, LLC (“Alliance Note”) for $5.0 million. Alliance’s 50% member and manager is a member of ApolloMed’s board of directors. The Alliance Note was due and payable to Alliance Apex, LLC on (i) March 31, 2018, or (ii) the date on which the Change of Control Transaction is terminated, whichever occurs first. As a result of the Merger, the Alliance Note together with the accrued and unpaid interest, automatically converted into shares of the Company’s common stock, at a conversion price of $10.00 per share (see Note 12). The Alliance Note was guaranteed by NMM prior to its conversion. Pro Forma Combined Historical Results The pro forma combined historical results, as if ApolloMed had been acquired as of January 1, 2017, are estimated as follows (unaudited):
| Year Ended December 31, 2017
Net revenues | $ | 478,873,780 |
Net income attributable to Apollo Medical Holdings, Inc. | $ | 9,982,706 |
Weighted average common shares outstanding: |
Basic | 25,525,786 |
Earnings per share: |
Basic | $ | 0.39 |
Weighted average common shares outstanding: |
Diluted | 28,661,735 |
Earnings per share: |
Diluted | $ | 0.35 |
The pro forma information has been prepared for comparative purposes only and does not purport to be indicative of what would have occurred had the acquisition actually been made at such date, nor is it necessarily indicative of future operating results. Alpha Care Medical Group, Inc. On May 31, 2019, APC and APC-LSMA completed their acquisition of 100% of the capital stock of Alpha Care from Dr. Kevin Tyson for an aggregate purchase price of approximately $45.1 million in cash, subject to post-closing adjustments. As part of the transaction the Company deposited $2.0 million into an escrow account for potential post-closing adjustments. As of December 31, 2019 no post-closing adjustment is expected to be paid to Dr. Tyson and the full amount of the escrow account is expected to be returned to the Company. As such, the escrow amount is presented within Prepaid expenses and other current assets in the accompanying consolidated balance sheet. The following table summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed, as of the acquisition date:
| Preliminary Balance Sheet
Assets acquired |
Cash and cash equivalents | $ | 3,568,554 |
Accounts receivable, net | 10,335,664 |
Other current assets | 4,360,850 |
Network relationship intangible assets | 22,636,000 |
Goodwill | 28,585,209 |
Accounts payable | (2,776,631 | )
Deferred tax liabilities | (6,334,368 | )
Medical liabilities | (15,319,714 | )
Net assets acquired | $ | 45,055,564 |
Cash paid | $ | 45,055,564 |
Accountable Health Care, IPA On August 30, 2019, APC and APC-LSMA, acquired the remaining outstanding shares of capital stock they did not already own (comprising 75%) in Accountable Health Care in exchange for $7.3 million in cash. In addition to the payment of $7.3 million APC assumed all assets and liabilities of Accountable Health Care, including loans payable to NMM and APC of $15.4 million, which has been eliminated upon consolidation. Including the 25% investment valued at $2.4 million already owned by APC the total purchase price was $25.1 million (see Note 6). The following table summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed, as of the acquisition date:
| Preliminary Balance Sheet
Assets acquired |
Cash and cash equivalents | $ | 581,965 |
Accounts receivable, net | 5,150,060 |
Other current assets | 198,056 |
Network relationship intangible assets | 11,411,000 |
Goodwill | 23,018,675 |
Accounts payable | (3,211,349 | )
Medical liabilities | (12,154,726 | )
Subordinated loan | (15,327,013 | )
Net assets acquired | $ | 9,666,668 |
Equity investment contributed | $ | 2,416,668 |
Cash paid | $ | 7,250,000 |
The Company also completed one additional acquisition (AMG) on September 10, 2019 for total consideration of $1.6 million, of which $0.4 million was in the form of APC common stock. The business combination did not meet the quantitative thresholds to require separate disclosures based on the Company's consolidated net assets, investments and net income. Pro Forma Financial Information for All 2019 Acquisitions The following unaudited pro forma supplemental information is based on estimates and assumptions that ApolloMed believes are reasonable. However, this information is not necessarily indicative of the Company's consolidated results of income in future periods or the results that actually would have been realized if ApolloMed and the acquired businesses had been combined companies during the periods presented. These pro forma results exclude any savings or synergies that would have resulted from these business acquisitions had they occurred on January 1, 2018. This unaudited pro forma supplemental information includes incremental intangible asset amortization and other charges as a result of the acquisitions, net of the related tax effects. The supplemental information on an unaudited pro forma financial basis presents the combined results of ApolloMed and its 2019 acquisitions as if each acquisition had occurred on January 1, 2018:
|  | Year Ended December 31, 2019 (unaudited) |  | Year Ended December 31, 2018 (unaudited)
Revenue |  | $ | 658,010,954 |  |  | $ | 726,074,752 |
Net income |  | $ | 10,867,496 |  |  | $ | 58,879,491 |
Net income attributable to Apollo Medical Holdings, Inc. |  | $ | 7,310,724 |  |  | $ | 9,447,002 |
EPS - Basic |  | $ | 0.21 |  |  | $ | 0.29 |
EPS - Diluted |  | $ | 0.20 |  |  | $ | 0.25 |
The acquisitions were accounted for under the acquisition method of accounting. The fair value of the consideration for the acquired company was allocated to acquired tangible and intangible assets and liabilities based upon their fair values. The excess of the purchase consideration over the fair value of the net tangible and identifiable intangible assets acquired were recorded as goodwill. The determination of the fair value of assets and liabilities acquired requires the Company to make estimates and use valuation techniques when market value is not readily available. The results of operations of the company acquired have been included in the Company's financial statements from the respective dates of acquisition. Transaction costs associated with business acquisitions are expensed as they are incurred. At the time of acquisition, the Company estimates the amount of the identifiable intangible assets based on a valuation and the facts and circumstances available at the time. The Company determines the final value of the identifiable intangible assets as soon as information is available, but not more than 12 months from the date of acquisition. Goodwill is not deductible for tax purposes. The following is a summary of goodwill activity for the years ended December 31, 2019 and 2018:
| Amount
Balance at January 1, 2018 | $ | 189,847,202 |
Adjustments | (242,456 | )
Impairment - (MMG) | (3,798,866 | )
Balance at December 31, 2018 | $ | 185,805,880 |
Acquisitions | 52,699,324 |
Balance at December 31, 2019 | $ | 238,505,204 |
During December 31, 2018, the Company wrote off the remaining goodwill balance of MMG of $3.8 million (included in impairment of goodwill and intangible assets in the accompanying consolidated statements of income), as MMG was no longer utilized and therefore did not provide any future economic benefit.

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- Definition The entire disclosure for a business combination (or series of individually immaterial business combinations) completed during the period, including background, timing, and recognized assets and liabilities. The disclosure may include leverage buyout transactions (as applicable). + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -URI http://asc.fasb.org/topic&trid=2303972 + Details
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